CMC Materials, Inc. (CCMP) 2002 Q3 法說會逐字稿

Good morning my name is Melissa and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cabot Microelectronics corporation third fiscal quarter earnings conference call. All lines have been placed on mute to prevent any background noise, after the speakers remarks there will be a question and answer period. If you would like to ask a question during that time simply press * and the number 1 on your telephone key pad. If you would like to withdraw your question press the pound key. Thank you I would now like to turn the call over to Mr Marty Ellen Chief Financial Officer for Cabot Microelectronics Corporation. Mr Ellen you may begin your conference

Thank you Melissa, and good morning everyone, this is Marty Ellen Chief Financial Officer for Cabot Microelectronics Corporation. With me today is Matthew Neville our Chairman and CEO.

Matthew and I will need about 15 to 20 minutes for our comments. After that we will open up to questions for about 30 minutes. This morning we reported our fiscal 2002 third quarter results. A copy of our press release can be obtained through our website or by calling our investor relations office at area code 630-499-2600. Today's conference call is being recorded. Access will be available for two weeks via telephone playback. The playback number is 1-800-642-1687 and you will need access code 4699183. Webcasting playback is also available through our website at Cabotcmp.com

Before we begin I would like to remind all of you that our conversations today may include statements that constitute forward looking statements. Such statements involving a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward looking statements. These risk factors are discussed in SEC filings including our reports filed on form 10K for the fiscal year ended September 30 2001, and on form 10Q for the second fiscal quarter of 2002 which ended March 31. I would like to again remind you that we assume no obligation to update any of this forward looking information. With that said I will review our financial performance for the quarter and then Matthew will provide a progress report on our accomplishments in the business. Afterwards we will take your questions.

We are very pleased with our strong financial performance this quarter. Total revenue for the third fiscal quarter ended June 30th, was 68.4 million, up sequentially 35 percent from the 50.5 million reported in the second fiscal quarter this year. When compared to the third quarter a year ago, revenue was up 33 percent. Volume was up 30 percent sequentially, while average selling prices were up sequentially by 4.6 percent. The average selling price improvement was primarily due to improved product mix. Our sequential revenue growth this quarter was broad based. We experienced strong geographic revenue growth in all regions.

On the application side all of our IC device products turned in solid growth. sequential revenue growth was 43 percent, while our combined and tungsten. Product revenues grew sequentially by 39 percent. The only part of our business which did not grow was storage, with revenues essentially flat on a sequential basis.

Gross margins of 53 percent this quarter were up sequentially 300 basis points from the 50 percent reported to the second fiscal quarter of this year. This improved gross margin resulted from higher volumes and improved product mix, despite a higher level of manufacturing expenses.

Operating expenses consisting of research and development, selling and marketing and general administrative were 17 million this quarter compared to 15.3 million last quarter and 13.6 million in the year ago quarter. R&D spending this quarter was 10.2 million compared to 6.4 million last quarter. At the beginning of this quarter we started up our new R&D facility with it's state of the art class one clean room. The operating cost of this new facility were part of the reason for this increase in R&D spending. With this new facility the depth and breadth of our product development and customer support activities have been enhanced resulting in higher levels of spending on wafers and supplies.

This quarters R&D spending also reflects an increase in R&D staffing consistent with our critical development plans. Selling and marketing expenses rose slightly this quarter while general and administrative expenses declined by 1.1 million. Of this decline in G&A expenses about half is the result of allocating certain facility common operating costs to R&D expense. These costs have previously been treated as G&A expense. This allocation had no bottom line impact.

Other income this quarter was 1.2 million, which includes an unrealized foreign exchange gain of 1.3 million associated with the strengthening of the Japanese yen. Our current estimate of our worldwide effective income tax rate for the fiscal 2002 year is now 33.4 percent up from 32 percent last quarter, resulting in a third quarter effective income tax rate of 35 percent.

Principally, as a result of the increased level of sales and gross margin net earnings for the quarter were 13.3 million up 73 percent sequentially from last quarter. This comparison excludes the net earnings reduction for the litigation settlement included in last quarter results. When you compare actual reported sequential net earnings the increase was 91 percent.

Diluted earnings per share for the quarter was 54 cents compared to 31 cents last quarter. Again after excluding the 3 cents EPS impact of the litigations settlement. Actual shares outstanding at the end of the quarter were 24.2 million while weighted average diluted shares outstanding were 24.5 million. Capital expenditures this quarter were 7.1 million, which included 3.6 million for our new Rdown from our previous guidance of 42 million. Depreciation and amortization this quarter was 3.3 million and for all of fiscal 2002 it is expected to be 11.6 million. At the end of the quarter cash and equivalents were 59.6 million, up from 51.4 million at last quarter end. Total debt including capital leases was 14.3 million, down slightly from the 14.4 million last quarter. Those conclude my financial remarks, I would like to now turn the call over to Matthew.

Thank you Marty, we are very pleased with our overall performance this quarter. As we have consistently our strategy during the industry's challenging times during the last year and a half has been to maintain our mission critical focus, to continue to advance our technologies along with our customer's technology advancements and to continue to make the appropriate long term strategic investment. We believe that our strict focus on these guiding principals have enabled us to achieve our many success and accomplishments which I would now like to review with you. I'd like to begin with a discussion of our copper business.

Sequential copper revenue growth this quarter was 43 percent and was two and half times the amount reported in the year ago quarter. Our copper revenue growth were board based this quarter across our key copper customers, this would seem to indicate that the industry is making good progress for the adoption of copper technology and overcoming the issues we previously discussed with you. You may recall that in prior quarterly conference calls we discussed our view that our prior quarterly slower copper growth rate with the result that certain customers having yield issues, some were experiencing capacity constraints and still others were attempting to get their copper IC device qualified at their custom. It appears our customers are making progress on theses issues.

The commercial copper devices that our customers are producing today are at the .15 and .13 microns node. Copper CMP is very challenging and because of our strong capability solid customer relationship and early focus on copper, which began more than six years ago, we've been able to establish the leadership position that we have today. As copper technology advances however, so do the challenges associated with it, the next generation copper devices at the .1 microns node are expected to incorporate new low K dielectric film and further features shrinks are expected to incorporate ultra low K film. Meeting these technology challenges is not easy which is why we've made the needed investment early on to be in a strong position to enable this technology advancement. As for the .1 microns copper devices, which are solaced for commercial production in late 2003 and early 2004, we're working closely with the technology leaders. Sampling and qualifications activities are well on the way and we're getting good feed back on our technology. We expect some customers to begin making their profit in supplier decision this year.

We have a fairly substantial investment around copper with three dedicated or indeed development team working on each of the different technologies including 65 nanometer technology which the industry expect to begin in late 2005 and early 2006. We remain confident in our ability to continue to meet these very customers needs. Revenue from oxide products on a combined bases grew sequential by 39 percent this quarter a encouraging sign.

This is the first quarter scene December of 2000 that we have combined sequential growth in these products. Two other data points worth noting, there a where no oxide pricing adjustments this quarter and the effect of process efficiencies that customers made in the usage of these products seems to have leveled off this quarter. Our offside products relative to the rest of our products are the most mature and have come under some competitive pressure. As most of you know our business model has being driven by technology leadership and with continuous improvement and innovation as a way to bring more value to our customers.

We follow that model in the past and continue to apply that model to the offside applications by having recently developed a new oxide products designed to further improve a important performance perimeter around defectively. This product is now being sampled by certain customers. The long term use of a oxide CMP is expected to continue and we expect strong future growth in our oxide business.

As for there are a number of good future growth opportunities while some layers in logic devices are expected to be replaced with copper dual . is still expect to be used in certain layers near the transistors. In addition memory devices which currently represent about 20 to 25 percent of the IC device market are not expected to move to copper so there applications are not expected to be effected. The industry continues to explore the design of new applications such as applications and for these reasons we continue to invest in the development of new products with improved performance around and defectively.

I would like to now move to a discussion of our data storage business. Data storage revenue was essentially flat on a sequentially bases this quarter while we are up 59 percent compared to the third quarter a year ago. The lack of sequential growth is due primarily to lower production during this quarter. As a result of softness in the end markets primary PC's and the reduction in the number platter per disk drive due to the dramatic advance in aerial densities of hard disk drops.

In fact certain of the large disk dive manufactures had end of the quarter factory slow downs. We have also not gained new business with new customers this quarter. To spite the present market conditions within hard disk drive industry, the hard disk drive manufactures have continued to rapidly advance there technology. Over the last two years the industry has made four major advances in data storage technology. By increasing storage capacity from 20 gigabytes to 80-gigabit disk drives. The 80 gigabyte technology is presently being transferred into commercial production today.

We have continue to successfully advance our product line offerings in support of our existing customers needs by providing new products designed to improve surface finish, and through put. We have two customers how are using our newest technology in raiding commercial production of there 80 gigabit disk. A third customer has very recently advices us that they intend to ant least part of their 80 gigabit process to us.

In addition, we're optimizing a leading edge technology for this 120-gigabyte process, which is anticipated to begin to ramp and in early 2003. With dedicated resources for our data storage business in Japan, we're beginning to make encouraging progress with Japanese disk and manufacturers. When you look at our year over year data storage results, we are pleased with the position we've achieved in such a relatively short time frame and we continue to work very hard to win new additional business. I am not prepared to comment yet on the changes we began implementing last quarter with our pad business. As we've said, last quarter, which I will repeat again today, we still believe the pad markets opportunity is attractive and customer pull is strong. We remain very active on multiple fronts in an effort to roll out comprehensive pad product offerings for our customers. When we are ready and able to do so, we will share this specific data of these programs with you. In addition to our product line results, the accomplishments this quarter include the completion of the implementation of our new global business system.

The last of our regions to implement this system went live this quarter. With all our geographic regions now integrated on a single broad base system, we have consistent and more timely information to better manage our worldwide business. Another significant accomplish this quarter was the startup of our new R&D facility in . It is a state of the arc facility, equipped with the most advanced polishing and metrology equipment to support the most advanced and challenging customer technology requirements. This investment gives us huge capability and we expect it to pay an enormous dividend. Before conclude, completing my remarks, I'd like to take stock of where we've been and where we may be headed. From March 2001 through March 2002, our monthly revenues were essentially flat. Those trends were characterized by good growth and leading edge products like copper, together with some growth in data storage, offset by declines in oxide and . The oxide and declines were primarily due to the production decreases in quarter micron and 0.1 micron devices. The growth trends for the most leading edge devices include those with copper interconnect technology have been pretty straightforward to understand as the industry has been aggressively ramping copper and advancing feature strengths to 0.13 micron level.

When we look back over the past year, the reduction in oxide and were probably attributed to the industry's burn of excess IC inventory. From external research data we've seen, these excess IC inventory levels appear to have peaked during the first calendar quarter of 2001 and have been slowly declining ever since. To the extent of this IC inventory burn, our customer's production levels pushed below these needed to support and market demand. We believe the stronger production levels experienced this quarter may...

levels pushed below these needed to support and market demand. We believe the stronger production levels experienced this quarter may be partially due to industry IC inventory levels now being in better balance so that production levels are now in better line with the end market demand.

It seems like every day there are new data points on what's happening in the end markets for IC devices. The data is unclear and mixed. The bright spots seem to be consumer-driven items like notebook PCs, video game systems, digital cameras, and maybe even some small growth in cell phones. Automotive appears to be improving as the electronic content in automobiles continues to rise.

The not so bright spots seems to be in those areas most affected by corporate IT spending, such as computers and telecom equipment. As we've said before, it's difficult for us to fully reconcile our customers' production with end market demand. Remember, however, that we have growth potential through technology advancement, which has been the opportunity of further penetration, and which should happen even absent robust end market demand.

That is why we've been able to grow historically at rates well beyond the overall semiconductor industry growth rates, as happened again this quarter. Remember that according to certain published research, only about 25 percent of total chip production in 2000 required the use of CMP in the chip manufacturing process. That penetration is expected to grow dramatically.

On our April 25th call, we said that we saw an increase across the broad pick up of orders and revenues in the first three weeks of April. Those revenue levels continued through May. We did experience some softening in June, but June's revenue level was still well above the monthly run rate we experienced back in the March quarter. And June's trends have continued into the first three weeks of July.

If our customers' production level are in fact now better aligned with end market demand, we are hopeful we may have reached a new quarterly revenue run rate level as compared to as where we were in March. As I just said, June and the first three weeks of July order activity were a little softer than April and May. Those are the revenue trends as we enter the fourth quarter. It's difficult for us to predict quarterly revenue because as many of you know, our order lead time is two weeks, and so we don't have visibility beyond that.

In closing, I'm pleased with our results this quarter because they reflect the extraordinary effort of a highly energized and motivated organization. They are also a further indication of the soundness of our business model, a model that we continue to execute on every single day. We believe we have the best people with the best technology, resources, and capabilities to capture the many opportunities we have going forward.

That concludes my prepared remarks. At this point I'd like to open up to questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Our first question comes from the line of

Good morning Gentlemen Ollie Romani here with Matthew I guess that 19 percent margin just makes you the most profitable manufacturing company in the whole semiconductor chain. Pleased with the results and also the fact that you are getting some guidance into the next quarter that that we could see at least revenues hold up at a higher run rate even with the softness here, I am wondering if you could pass those comments, those sequential comments into segment by business segment. Do you see for example copper continuing to gather strength in the third and the fourth quarter and do you perhaps some of the softening coming from Oxide and Tungston and or do you see this being a kind of across the board softening that you have seen in June and July?

The way I would comment back is, it is very early on into the fourth quarter and so it is really hard to draw real strong correlations, but we are continuing to see broad base across all application. We are seeing particularly strong growth in copper as we said at the beginning of the year, we expected a 2x growth in copper and we expected to see most of that growth occur in the second half of the year, and that is what we are seeing. We are probably seeing the strongest growth in copper but we are seeing the growth broadbased, given that we only have three weeks of data it is early to say how that trend will continue through the rest of the two and a half months remaining.

Sure I am hoping maybe you could give us some sense of where inventories may be at your customers at this point, did they buy just in time for their slurry consumption and had they come out of the June quarter with levels of slurry inventories they are still low, in your opinion.

Yeah we take great care, we have got good systems, we have got good relationships. We monitor our inventories very carefully, as you know we are a make to order business, the customer makes an order we have two week turnaround and we ship to them. We do manage a fair amount of inventory for some of our bigger customers and we also have some view into our customers inventory through our distributors as well as directly with those customers. We monitor on a weekly basis and we think we are on target with where we want to be which has traditionally been between a two to four week inventory levels at our customer, and so we see no real increase in the inventory levels.

Great, thank you very much

Thank you Ollie.

Your next question comes from

Good morning Could you comment on the profile through the quarter for the three different areas, copper, data storage and Tungsten Oxide, were they all sort of parallel, in terms of the momentum through the quarter?

As best we can tell from the data, at a high level, they have all grown through the quarter at a relatively equivalent rate, so the pickup we have seen and let me be clear has been broad based across all applications across all regions and obviously we as we have said we have seen the strongest growth in our copper business.

And I think you just mentioned in answer to one of the previous questions you said that copper growth you stated would double.

Yeah volumes revenue would be double this year versus last year right

Right, what we said at the beginning of the year, that we anticipated it at least to growth in copper for the year, we'd seen most of the growth, or a large part of the growth in the second half and that is reflected in this quarter's results.

OK. When you, when you talk about the in, I mean, when you talk about the revenue in April being very strong and continuing in May, and then falling up a bit in June, you're talking about on a sequential month to month basis, is that your metric?

Sequential month-to-month rate.

OK. So the in June and early July is a little bit lower than April and May, right?

That's correct.

OK.

Correct.

The yen issue is then adjustment of the accounts receivable, given that the yen has depreciated, is that what's going on?

Yes Marty. That's correct. We had, we have a receivable position and we benefited from the strength of the yen. We have since hedged that position so we're not expecting any significant unrealized gains or losses going forward.

OK. Do you, are your prices in dollars or are they in foreign currencies?

They, most of our Asian sales are in fact denominated in dollars, but we do have customers in Japan whose sales are denominated in yen.

OK.

Right, Marty. On the manufacturing side you mentioned that your margins were up despite higher manufacturing costs, your higher manufacturing costs that you're talking about are fixed manufacturing costs?

Yeah, well, there were cost increases in a number of areas in manufacturing. We tend to call them fixed manufacturing, but actually, if I look at where the cost increases occurred, at least a third of the increase was actually in labor. You have to understand that all our production workforce is primarily a salaried workforce, so in that sense, you know, within given ranges of volume, their costs are fixed. When you have the kind of uplift and volume that we had this quarter we do incur over-time and other incremental costs.

OK. So had, so had you not had those fixed, or those increases in those manufacturing costs the volumes would have resulted in a much stronger margin increase in the quarter, is that right?

That is correct.

And my calculation would suggest that copper is now 20 percent of your total revenue pie, is that, it that right.

That is correct.

OK, and what would the expectation be for the, for the year.

Well, as I think Matthew said again, it's, that requires knowing what full year revenues will be, and, in the fourth quarter, which, you know, we can't give and are not able to give guidance on. I think you'll, you've been following our numbers, I think you should pay above, roughly, 32 million in year to date copper revenues. Our earlier comments during the year was at least growth. If we have the same kind of copper revenue performance this quarter, there'll be an excess of that. We just have to wait and see how the fourth quarter unfolds.

OK, alright, fine, thanks.

Thank .

Again, I would like to remind everyone, in order to ask a question please press star, then the number one on your telephone keypad. Our next question comes from with .

Matthew.

Good morning Jay.

How are you?

Very good thank you.

Give us a flavor of how you're going to conduct your guidance going forward in subsequent quarters and when you'll change depending on vitality reestablishing it's self in the business. The reason I ask the question it seems to me with having gone through several quarters with revenue in the 50 to 55 million dollar range and your indication that at the end of April that business should improve some what the gap between where the street numbers where and what you reported seem a bit excessive. And I wondered if there was a mechanism that you could resort to when you saw what was happening in May to communicate this to a mid quarterly update?

I think it is a great question it is one we talk about a lot internally. And one that we will continue to debate internally about how address that . I think in the back drop you to look at what I happening in the over all environment and what we are finding even though we have a very short visibility with a two week cycle in our manufacturing and order pattern. It makes it difficult for us to predict now when you have a lot of externally data and a lot of confidence in the externally data you can begging to have better confidence in making statements about where you think you are going. I think if you look at what is happening over all I think the inclement to day is to people are sharing less, visibility is hard to believe gotten worse and therefore everybody is being very and so that what we want to avoid doing is the kind of things some companies have had to prerelease twice.

In this last quarter because things have changed, and so we would rather be and not over state and state when we have solid numbers and when we are confident in the numbers and that is why we haven't and we continue to look at this we know it makes it tough for investment community to understand what is happening but we think the is to communicate when we have got solid hard numbers from which they can work from which they can work from and not speculate and so that is how it has being our business model but we do hear your message, we do take it seriously and we do talk a lot internally about it and it is one and it is one that we will always come back to and try and address.

I wonder if we could get Marty to talk a little bit about the companies business model, are you interesting to stay at a mid teens R&D ratio percentage of revenues I think the 19 percent net margin is some you have talked about in the past, when we look back ward a year from now what do you think the appropriate business model will look like?

good morning let me talk about that first off a I think we said before business model does include keeping our gross margins ain excess of 50 percent, we reported 53 percent this quarter up from last quarter, we got some volume uplifts and better mix. This margin range you know we have achieved in the past in the sort of low to middish 50 percent range. We will get some uplift in margin next quarter, the expiration of the royalty has actually occurred. It occurred June 30th and that gives us some uplift. As we have said in the past about spending particularly research and development, you know we don't manage as a percentage of revenue, we incur those expenses and is not what we think we really need to do to stay in our technical leadership position.

That being said, we did have, and we talked about this last quarter, we did expect for the most part the increase that occurred this quarter because we brought on line the new facility and given that step change increase in costs this quarter we expect much more modest growth in those expenses going forward, in fact we are not expecting much increase in overall operating expense for the fourth quarter.

Let me, economic model I don't think we should just leave it from an income statement point of view but from a capital point of view, and as I said in my prepared remarks capital expenditures are only going to be about 4 million in the fourth quarter to bring us to 36 million year to date. As everyone knows we have had very strong ROICs, return on invested capitals returns. The point of my saying that is when you look at what we have done in terms of the out of the company's infrastructure and roughly $100 million or so we thought we would spend on the last two and a half or three years to build our world wide facilities, build the R&D capability and on the operating side make the investment in R&D that we have made you know, roughly 10 million or so a quarter. With any uplift in the industry and in our business we should get enormous leverage both with respect to operating returns and capital returns and those are the exact two things you need to do to create value. We did say in our prepared remarks which is obvious, yes we had good revenue uplift and margin expansion, we also added quite a bit of operating cost and yet we were still able to take a 35 percent sequential revenue increase and double it, in terms of rate of increase in earnings which I think is a real power pull economic model.

I have some other questions but I think I will get into the back of the queue now Thank you.

Thanks

Your next question comes from the line of

Good morning and congratulations on I guess what I would characterise "in your face" good results

Thank you very much

You said that June and early July were softer than April and May, were they actually softer than the average in the first quarter, that is was the drop off significant that you are now running at a lower than the average last quarter or are you still equal or above the average?

Let me just be clear about that as we said in the prepared remarks that the run rate in the June and July are well above the run rate of the first and second quarter.

You combine the Oxide and Tungsten in your comments I assume the Oxide grew more slowly giving you have been backing away from that market as it became more price competitive, could you confirm that or you have got a new Oxide product you have introduced so maybe we should think about Oxide and Tungsten being sort of parallel growth.

What I'd like to do is just characterize the perception you might have. We're not backing away from the oxide business. One of our key strategies is the full offering of all polishing slurries for all applications existing in . And that will continue to be an important part of our business, and that's why we're making investments in R&D and development of new products.

We also put a fair amount of money into improvements of our existing oxide products. What we stated, and we haven't given a break down between oxide and tungsten -- but that we saw good, strong growth in both of those components.

I think the data is pretty obvious that you've lost some share in oxide, which obviously you couldn't maintain 100 percent share from where you started. But is this part of a share regain strategy or just to try to now draw the line and hold your share in the oxide business.

To the best of my knowledge, over the last couple of years, we haven't had a loss of share.

OK. And should we also expect the average selling price numbers to be a little bit less robust as oxide maintains its share of the portfolio or at least doesn't decline in percentage terms as much as it has in the past couple of years.

I think what we've said is, you know, over this last year and a half there are only two cases where we've -- for strategic reasons have made price adjustments, and it was for strategic reasons. Two large key customers that we see as strategic customers. We've got broad based business with them and it was an important thing for the relationship and our overall strategy with them. Other than that, we have not had a lot of price as you -- reductions.

OK, and then just lastly. When does the density increase in the data storage market, or the shrinkage and the drive features get you into actually polishing substrate rather than just polishing the read-write head.

We do polish both -- both components. The bigger part of our business actually is the substrate or the disk drive. And we've been polishing that since probably the 10 or 5 gigabyte platters. And surface finish is critical in that application, and it is a bigger part of our business, and it will continue to be an important one.

I think the change that's happened is we -- in the platter type or the disk application, we were only going after the final finish polishing part of the business, and we now are having products out on the first step of polishing, so we're broadening our position.

And the competition, here, I believe, is somewhat different. I know -- I believe is at least in the initial processing but not the final side. Who else do we have from the semiconductor CMP market that you view as major competitors in the disk drive data storage area?

The two major competitors that are in the disk drive business are , who -- this was a large part of their company and the focus of their business, and , are the two.

Got it. Thank you very much.

You're welcome, .

Your next question comes from the line of with UBS Warburg.

Great performance guys and, Marty, on that gross margin question, this gross margin was before that royalty, I presume, and that would add a little bit so ...

I guess on a normalized we're already over 55 percent give you an opportunity to do some stuff, I'm just wondering, you know, with that kind of margin now, this is clearly not an industry peak condition and your mix clearly will move toward copper or are we being conservative with the margin. Can ASP hold up here?

Our guidance has always been margins in the low to mid fifty range and I, we continue to provide that, simply because we recognize that the business is competitive and that will keep some pressure on margin performance. As the technology increases, we need to continue to make investments in our capabilities and, and so that's why we'd like to not have people think about margins continuing to wrap up. If our volume and mix stayed the same next quarter as in this quarter, and with the exploration of the royalty we'd be at roughly at 55 percent and the question is, that we can't answer of course is, you know, what will volumes be next quarter, what will revenues be? That's the best guidance I can give you right now.

OK. Great. And then my other question was, the leverage question, not within the forecast, but just kind of leverage with the capacity we have now, I guess if you kind of take this quarter and just for the royalty you're probably maybe, you know, a two dollar and forty cent . I'm just wondering what, now where are you relative to capacity, it's clearly not a peak industry condition, it's off the trough, basic capacity you have now, I mean, are you running, you know, on a pickup number of 70 to 80 percent of capacity? Can you capture a lot more sales than what you have now?

Yeah, let me just answer that. We don't normally share a lot about our capacity, but I think if you look at what statements were earlier and what we've said in the past, we always invest way ahead of demand. We have made two major investments in capacity in the last two years. We doubled our capacity in our Japan manufacturing facility this, last year this time and the year before we brought on a, the largest manufacturing facility in the U.S., which we think gives us the ability to take on at least , so we're well positioned for growth and I think the other point that Marty would make, were he talking, it also means that we don't see the need for large capital investments going forward, because of the investments we've made both in our R&D capability and our manufacturing.

So it remains to be said you could do , the volume you're doing now?

Yeah, the way we build our facilities, and me explain it, we build large shells infrastructure, all the infrastructure in place and then as demand go we add lines, production lines and so that as we go, as we go, we'll add small increments of investment to bring on the new production line.

OK. Alright guys, well hopefully, as you know, your grade numbers are being offset by the meltdown and hopefully it'll become clearer after this. Thanks for your help.

Thank you.

Your next question comes from the line of Bob Court with Goldman Sachs

Thanks very much, Good morning

Good morning Bob

Matthew I was wondering if you could talk a little bit about what the challenges have been to broadly commercialising, not necessarily the CMP aspect of it but copper based circuitry and where CMP plays a part in that, and then secondly many of your competitors in CMP have started to team up. I am wondering if you could just comment a little bit about some of the development work you have done with partners or what the general approach is towards partnering.

Let me just talk about the copper technology and then lead into your other two questions. You know copper has been an extremely challenging technology and it has represented a major challenge for our customers in developing an integrated process for that. We do play a key enabling role in that because we enable the use of copper by the CMP process. Very stringent requirements in a very tough environment to work, copper is a very tough and complex material. It corrodes very easily it dishes and erodes very easily and it is very susceptible to defects and all those are yield killers, and so what we have done is focus very early on with the technology leaders and worked closely with them with the enablement of copper CMP.

We have as we said a broad based technology investment both in terms of investment in infrastructure as well as having broad breath multiple development teams focused on each of the key technology nodes.

And the way we approach it is today our kind of partnering occurs with our suppliers in enabling their technologies and tailoring their materials into our products and it is both on the chemistry side where we are starting to engineer certain functionalities in the chemistry to get the unique performance as well as that in the particle, and so that kind of hopefully gets to your first two questions

We are seeing some partnering of companies most of those are companies that aren't in the CMP sector and also don't have a large electronics presence and so we are seeing them do that I think the most recent announcement was Dupont's acquisition of EKC. That was done probably for multiple reasons across all of business lines.

OK. Thank you.

Follow-up question from Gill Yang with Salomon Smith Barney

Hi could you just comment on the data storage, was that a surprise to you in any way to you or were you disappointed by it, and what kind of visibility do you have on acceleration of that business going forward

I would think given the environment we are not surprised nor are we disappointed I think that the real story that probably gets missed you know when you see the flat trends it kind of raises the concern what is going on and I think there are two dynamics that you need to understand. Today they are really tied to the PC sector, where I think the opportunity for future growth for that industry is as they start going to discrete devices. Some of that is beginning to happen and hope fully we will see more of that and I think as that happens and as they diversified into stand alone applications you will see broader industry growth.

The other thing that you need to understand is that technology and it's probably not well recognized, is one of the most is one of the fastest advancing technology that we work in. And so what they have been doing is normally the older disk drives had multiple platter and heads and they have advanced there technology so rapidly that they have actually being shrinking the now we think they have reached the end of that and now because now they are down to single platters single heads in the most advance disk drives so the decline will stop and there for the will and you will begin to see the full market pull through.

I think the other component is with all that technology advancement we have been working very closely with the industry in advancing our products and we have been able to maintain our existing customer base through four generations and I think that is a significant accomplishment given that we are a new entrance to that market and so we are very please with how not only how we have be able to enter market but we have learned to adapt to such a fast pace changing environment.

And the third one the third one point that I would just say is that, I'll leave it at that.

We will take one more last question.

Your last question comes from with .

Matthew could you provide a little as to you have talked you divide your business into copper trunks and oxides , data storage as the main components how large is the copper market going to get relative to your other markets and over what period of time?

that is a great question and what we expect and I think we have kind of implied it in the talk today we expect to continue to see a strong growth in both our oxide and business and I think that is some thing that is not well understood and we expect that growth to continue out over the next four to five years so we are going to expect to see continued strong growth in that part of our business. I think with copper you are going to see the reason you see such a growth it is the most leading edge technology for some of the chip cell. And there for we have seen growth I think next year we expect to see pretty strong growth we are in the middle of our plan process and so we don't have firm numbers but it will continue to grow at a much faster rate.

At some point it's growth will become large enough that it will start to slow down and I think the really question is going to be how much of copper will ever penetrate into the memory sector which will also be a big part of that .

Can copper become 40 percent of the market place that you serve?

From the outside studies I have seen 40 percent of the industries or the ?

the industries obviously.

When I have looked at the external studies that have been done by the tool companies, they would say the install would still be larger four or five years out in the combined oxide/tungsten.

OK. Thank you.

You're welcome.

With that, it concludes our remarks. I'd like to thank you all for your time and interest in the company and I look forward to speaking with you next quarter.

Thank you for participating in today's Cabot Microelectronics Corporation Conference Call. This call will be available for replay beginning at 12:30 p.m. eastern standard time today, through 11:59 p.m. eastern standard time on August 08, 2002. The conference ID number for the replay is 4699183. Again, the conference ID number for the replay is 4699183. The number to dial for the replay is 18006421687 or 7066459291. Thank you for participating. You may now disconnect.